Brazil BACEN Resolution 229 Impacts Credit Risk & DLO

BACEN Resolution 229

Resolution 229 falls under DLO — Brazil’s major umbrella risk reporting framework — the Demonstrativo de Limites Operacionais (Statement of Operational Limits). Its purpose is twofold: to fine-tune the credit-risk calculation methodology, and better align with the Basel Committee on Banking Supervision’s (BCBS) recommendations. And its arrival comes as no surprise in the context of the ongoing global Basel III reform trend. Firms in scope are on an evolving Basel journey that is becoming more complex — in Brazil and globally.
 

Basel III-Driven Credit-Risk Fine Tuning — Bottom-Line Implications.

The Resolution’s focus on credit risk directly impacts a firm’s capital requirement. It establishes procedures for calculating the portion of risk-weighted assets (RWA) related to exposures to credit risk subject to the calculation of the capital requirement using the Standardized Approach (SA) — a global trend under Basel III reforms. Indeed, the new Resolution improves the standardized credit approach, enabling a potential reduction in credit RWA exposures and in the total amount of regulatory capital held by financial institutions. In short, the Resolution’s outcomes can change a firm’s bottom line, and for several, the change is anticipated to be positive.

So, it is important that firms gather the right data and execute the calculations precisely. Especially considering its direct impact on a firm’s P&L, banks are strongly motivated to seek the most integrated and automated system to manage this Resolution’s and DLO’s overall complex data, calculation, and reporting requirements.
 

The RWA Rule Changes — More Granular, More Data-Intensive.

BACEN made two primary changes. Namely it:
 

• Created new, more granular classifications for counterparties
• Added new risk-weight rules

To comply with the new credit RWA calculation rules, banks must classify counterparties according to new segments. To achieve this, the bank’s processes must become more data and calculation intensive and accommodate more detailed downstream reporting. On the other hand, if such processes are effectively implemented, the Resolution creates an opportunity for banks to become more capital efficient via a more optimized approach to risk mitigation.

Globally, financial institutions are experiencing a common regulatory-driven push for more granular data reporting. With respect to Resolution 229, this challenge centers on the need to classify new segments (as shown in the following two examples) using more granular data that can be difficult for banks to capture and properly identify.